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St. Jude: An Insider Sign To Investors?

March 21, 2004

St. Jude, the patron saint of lost causes, rarely has needed to look out for his namesake, St. Jude Medical (STJ). Since its birth in 1976, this maker of artificial heart valves, defibrillators, catheters, and sundry other cardiac devices has led a blessed life. It's in excellent health today. So why are insiders dumping the stock?

During the year's first two months, 10 St. Jude insiders sold nearly 637,000 shares. That contrasts sharply with 2003, when St. Jude's officers and directors cashed out of fewer than 380,000 shares through the entire year. Leading the pack in 2004? Chief Executive Terry Shepherd, who exercised options on 220,320 shares and sold them all right away. It's enough to make you think St. Jude is living on borrowed time.

A close look at the St. Paul (Minn.) company's filings finds that Shepherd has a good reason for selling his first shares since joining St. Jude in 1994. He is set to retire in May. Under the company's employee stock option plan, he must exercise his 1,468,000 options by Aug. 9 or lose them. Given this plain explanation, Wall Streeters haven't suffered palpitations, company spokesman Peter Gove told me. "There is still in many people's minds a long way for this stock to go," he said.

JUST THE SAME, Shepherd's retirement doesn't explain why nine other St. Jude insiders are lightening up. That's one reason you won't find me trying to take the other side of Shepherd's next trade. Not now, not with the price anywhere near the high of $79.03 it touched the other day. The company says employees with stock options just want to diversify their sources of wealth, and they get only a few trading windows each year to do so. But when so many well-placed insiders sell as many shares as they have at high prices (table), it sends a signal, according to Jonathan Moreland, research director at InsiderInsights.com. "Insiders appear pretty happy with the [stock] price now," he said.

I'm not knocking St. Jude's operations. It has an admirable record. Earnings grew by 25%, 32%, and 21% in the past three years. It's just that, as insiders are indicating, the stock already reflects great expectations for fresh growth. Two independent directors I spoke with, David Thompson and Thomas Garrett III, described St. Jude's prospects heartily. Thompson noted St. Jude has announced that revenue may expand this year by as much as 19%, to $2.3 billion, and profit may grow up to 20%. He added: "If we're saying that, we're probably going to beat it -- that has been our record."

One key to such success would be a new device designed to treat heart failure, the Epic HF. St. Jude, on Mar. 9, reported upbeat clinical-study results. It expects Epic HF will win regulatory approval by May. If so, fast sales of similar "cardiac resynchronization therapy" devices by rivals Medtronic (MDT) and Guidant (GDT) suggest that St. Jude's revenues would surge. The only problem is, the market knows this. The analysts' average estimate of 2004 earnings is $2.20 a share, 20% higher than last year's. But above $78, the stock trades at 35 times 2004 profits. Does the stock now reflect St. Jude's potential growth? "I think that's possible," director Garrett told me. "If the market turned out to be disappointed, then I would anticipate the [stock] price might be impacted." My translation: Look out below. By Robert Barker